The difficulty of establishing a free market in taxi rides

Occasionally a taxi driver will complain to me about the costs of licensing or the expensive safety test he is about to send his car in for. I always suggest that there is no need for taxi licensing at all. The taxi driver does not like this one bit. Of course not: the main purpose of licensing is to restrict supply and keep prices high.

This is rarely admitted. Instead we are warned of the dangers of unlicensed taxis. And dangers there are, but it is nothing that can not be solved with private certification schemes or branding.

The makers of a smartphone app called Uber are currently having various battles with taxi licensing authorities. They want to make it easier for people to order and pay for taxis and presumably in return take a cut of the fares. Price controls, metering and rules about how drivers are paid are getting in their way.

Meanwhile in Chennai, auto-rickshaws (known elsewhere as tuk tuks) are not metered. There is a campaign to have meters installed in them to fix the prices along with “proper” regulation and licensing. One problem people are complaining about is high prices; another is the behaviour of drivers, such as choosing customers and forcing people to share rides. These problems suggest to me that there is a shortage of auto-rickshaws, but my friend from Chennai disagrees. She explains that there are plenty of drivers, but they agree amongst themselves who will take which passenger so that passengers can not choose between drivers to get a better deal. This sounds like union behaviour, and an obvious question with perhaps an obvious answer is: what stops drivers operating outside of the union?

the auto stand in my area itself (near perungudi bus stop – OMR)…… they will ask triple the charge if they see me in urge of going (dressed like professional)…. they will not let the autos to stop which are passing by… so we will end up in negotiating with those guys & pay atleast double the amount of real charge… apprx – 20 rs / km… this happens almost all the time….

Establishing free markets is never easy.

September 10th, 2012 |

16 comments to The difficulty of establishing a free market in taxi rides

Interesting to note that technology has now made the last arguably-justified preserve of the London cabbie – ‘the Knowledge’ – completely obsolete, at a stroke.

There’s no longer any need for a cab driver to have intimate familiarity with the streets of the city. With GPS on the dash, and his fare able to check on what he is doing with the same technology, the driver needs only to know how to drive.

The only thing holding back a flood of taxi technology is the horse-and-buggy regulations that starngle taxi services in most major cities. Uber is just the tip of the iceberg of what’s possible.

With that out of the way, establishing a free market in cab rides is easy. Set a safety-inspection standard for vehicles for hire or reward, set a testable driving standard for drivers for same, certify meters for those who want to offer a metered service, mix well and serve. Driving passengers should not require any more-demanding standard for drivers or vehicles than those required to haul potatoes or dog food. All these silly-ass standards about hailing on the street or having to pre-book and fixed rates and standard colours is all just a load of outdated nonsense that does nothing but empower monopolies and raise consumer prices. Let cab drivers (or cab companies) evolve in whatever way seems to them to be the best to attact the custom of the citizens.

Funnily enough the minibus taxi industry is about the only free market that came out of Apartheid South Africa. The old government was considered right wing but basically oversaw lots of big nationalized monopolies and a few corporatist ones. The taxi companies grew up spontaneously in Black communities. Entrepreneurs saw a need and provided a service.

There’s constant call from the upper classes to regulate them more. I used them for two years and it has to be said that I like them just the way they are.

One of the best ways to get to be that big is to find a willing government who will make competing with you illegal.

I’m not convinced true mega-corporations would even be possible in a truly free market. A company would expand to a certain point, say 50% of market share, at which point a sea of imitators and cheap equivalents would flood the market and gobble up the remainder.

there is a level of taxi regulation that is good, but covers only those things that everyone would want, where the buyer cannot see things about the service transparently.

For instance, you can’t get a cab license if you have convictions for violent crimes. OK, you could have a free market solution of the driver having to put up a sign informing people that they were a convicted rapist, but simply stopping people driving a cab is about the same thing (as a rapist driver isn’t going to get too many fares).

Likewise, most of us would like to know that a driver is insured for carrying people. And also, that they have a driving license.

And in some areas of the country, that’s about it. And that’s all you need. No “knowledge”, no kissing up to committees and having to be in the right political parties (it happens).

Funnily enough the minibus taxi industry is about the only free market that came out of Apartheid South Africa.

They tried that where I live, but the taxi-diver lobby got it shut down after a few months.

Jaded:

Having now worked in four different but highly-regulated industries in my career, I can confirm what you say. In each case, it has been established companies in the industry itself that have asked for the regulations, for one of three reasons. One is to limit competition. The other two, which have been very important in aviation, medicine, and nuclear power, is to limit liability and to assist the industry in convincing the public to use its products.

In the U.S. and Canada (and, I expect, other countries), companies in the nuclear power industry have been given an explicit limitation on liability, through legislation. But in any industry the existence of legally-mandated regulations creates an implicit limit on liability in that proof of compliance with the regulations tends to be regarded as proof of non-negligent behaviour.

There is no real problem with a free market in taxis for regular, local customers – ie customers likely to provide repeat business for taxi drivers. In this case the customers discover who is honest and cheap quickly, and give them their business.

There are potential problems with customers who are not likely to provide potential repeat business. Travellers from out of town who have just arrived, who require a taxi, who have no idea what a fair price is or what local customers are, and are tired are always preyed upon by dishonest taxi drivers who prey on them and overcharge them. The trouble with regulation that includes price regulation as an attempted solution to this is that regulatory capture generally happens incredibly fast, and the result is simply high prices for everyone. So what to do.

Well, regulation should regulate honesty rather than trying to micromanage the business. Such things as “The fares charged must be clearly displayed on the side of the taxi. The meter must be honest. The driver must travel by a reasonable route” strike me as reasonable requirements. Penalties for dishonesty can be harsh. (This is fraud, basically). However, fares should not be regulated and there should be low barriers to entry, if any.

Funnily enough the minibus taxi industry is about the only free market that came out of Apartheid South Africa.

Minibus shared taxis exist everywhere that they are allowed, ie almost everywhere in the developing world. The have a different name everywhere, but they work the same way everywhere. They have a fixed route unless you pay extra. You pay the driver, or alternately there will be a conductor to take your money. I have used them in many, many countries. (I suspect that they are actually the most common form of public transport in the world). One of the most interesting things about them is that drivers of shared taxis are *never ever* dishonest about fares. A foreign tourist who does not speak the language gets charged the same as everyone else. I think it may be that the fact that the foreigner pays his fare in front of the eyes of the regular, local customer. If a driver cheats a foreign tourist, the local customers might notice, and they might disapprove and that would be bad for business. Or possibly it is simply that the sorts of tourists who catch shared taxi minibuses are the price conscious ones, and this is understood. Or possibly it is a bit of both.

OK, you could have a free market solution of the driver having to put up a sign informing people that they were a convicted rapist

This is actually an example of a regulatory solution, not a free market one. The driver is required, by means of some form of regulation (and presumably monitoring) to keep a sign in his cab informing potential passengers of his past wrong doings.

A free market solution would be to put up a sign in your cab, voluntarily, informing potential passengers that you had been vetted by a private detective or security firm, and that they had given you a clean bill of health. Certain firms in the vetting industry would quickly become trusted brands, which would give consumers confidence in the honesty and safety of the driver.

This is the sort of solution which will evolve in a free market, if customers perceive a need for it. The only things which can prevent it are a lack of perceived need among customers, government regulation replacing it, or unionisation of taxi drivers creating a closed shop (no competition, so no selective pressure on the drivers to respond to customer needs).

I have no objection to an association of taxi drivers (or whatever) putting special badges on their taxis and running an advertising campaign saying “do not use taxis that are not members of our association, they are no good for the following reasons…..”.

What I think we all object to is the state useing FORCE to establish and maintain a cartel.

By the way this is also true of the “white collar unions” – the doctors (the AMA was exposed by Milton Friedman more than half a century ago) and (of course) the lawyers.

Were it not for the cartels imposed by force, I could well see an app for your smartphone, where you simply enter the address you want to go to and the number of riders, and cab drivers bid on your ride. Vetting is done by the app provider, which is funded by a cut of the fare that the cabbie pays if he wins the business. The cabbies bid both fare and waiting time – one cabbie bids $12 for the ride and I’ll be there in 4 minutes, but another bids $8 if you can wait 12 minutes – you get the drift. Riders can pre-offer – I’ll be ready for the cab in 20 minutes – to broaden the pool of available cabs and maximize bids. Riders can post customer reviews, so you can reject a cabbie’s bid based on his review numbers. The app shows riders and cabbies the winning bids for recent comparable journeys. Cabbies can advertize fixed rates – once you open the app, it knows you’re at the 4 Seasons, and cabbies can pre-bid you rides to the most common destinations – so much to JFK, so much to the ESB, and so forth.

GPS makes it all possible – it eliminates the variables that shaped the current model of taxi service. Customers can know where cabs are, cabs can know where customers are, and where they want to go, in real time. Eliminate the variables and you reduce the costs, for both riders and cabbies.

Excellent idea and, of course, just the tip of the iceberg. One of the hardest ideas to get across when critiquing regulation is opportunity cost. Human ingenuity is amazing, and we are missing huge opportunities for improving life and solving problems by legislatively preventing them from being invented.

Some time ago there was a thread about optimism and pessimism and the idea of naive pessimism came up. This would be a great example. Pessimism, not checked by an understanding of human ingenuity and opportunity cost, leads to the regulatory solution.

Always talk to cab drivers, you can learn lots of interesting things (and not just about cabs).

Boston recently tried to shut down Uber using the Massachusetts Bureau of Weights and Measures. The bureau said using GPS for distance wasn’t a certified method of measurement (seriously). It was overturned when everyone (and I mean everyone – from the Governor on down and the tech community upwards) made a stink.

Cabs in and around Boston use the medallion system: a fixed number of medallions are sold and resold. The price of a medallion is around $300k in Boston but much less in nearby Cambridge and Somerville. As a result non-Boston cabs that drop off fares in Boston aren’t allowed to pick up passengers on the return trip – obviously a law to restrict supply. Boston has a “hack unit” of police dedicated to enforcing the rule. Somerville has one part time officer. As a result the no-foreign-pickup rule is enforced by the cabbies. A Boston cabbie who picks up a return fare in Somerville can expect to get his tires slashed later.

Cambridge has a flat fee to go to the airport. The rule was sold as a consumer protection – to prevent tourists from being taken for a literal “ride”. Over time the fee went up and is IIRC now $40. My office is in Cambridge about 1.5 miles from the airport. It is cheaper for me to take the subway several stops *away* from the airport and get a cab *to* the airport from there.

Oh, if you take a cab to a strip club in the US never, ever ask the cabbie for a recommendation or take unsolicited advice. Cabbies get a per-head cash bonus from clubs for the people they drop off. The cabbie will steer you to the place that is currently paying the most.

At Skopje airport in Macedonia last year, I found the worst regulated taxi mafia I have ever seen, and that is saying something. Not only is there no public transport of any kind into the city from the airport, regular taxis are not allowed to pick up passengers from the airport either. There is a special class of horrendously overpriced “airport taxi” that is the only way of getting into town from the airport. When I arrived in Skopje last year I was approached aggressively by half a dozen of these taxi drivers as I walked out at the terminal.

This pissed me off. I had already found out about their scam (and knew that they were likely to charge me something like 25 to 30 euros to get into town), but their being rude and aggressive to me as well annoyed me. (Note to foreign touts trying to sell me stuff when I am visiting your country – I do not like it when you keep trying to sell me something after I have said no, and I *really* do not like being shouted at. Being in a situation where the people selling you something have done their best to make it impossible to prevent you from buying it does not lead to high standards of customer service, generally, either. The supposed justification for this taxi mafia is probably so that foreign visitors will receive a “high standard of service”, I suspect).

So I walked out of the carpark towards the road. The taxi drivers followed me halfway out of the carpark, but eventually figured out that I meant it. I had downloaded local maps onto my iPad, and I knew that there was a town perhaps half to three quarters of a mile away, and that this was on a long road connected to several other towns and the centre of Skopje. I walked down the side of the busy road and past the field full of ageing NATO military equipment that had been brought for some use in Kosovo and after a half hour or so reached the town and road on the map. My guess was correct, and there was a bus stop on that road, and people waiting at the bus stop. (There were also bars, restaurants and grocery stores in the town, that were open). I waited a few minutes, a bus came along, and caught the bus into town. The fare was about 40 cents. The bus driver was warm and friendly.

Amount of effort required for the local bus company to offer a service to the airport? Essentially none at all – that existing bus route would merely need to divert briefly to the airport. However, the airport taxi mafia was clearly powerful and well connected enough to prevent this. First impression given to foreign visitors by all this: Skopje is a town full of rude, nasty rip off merchants. (As is often the case, most locals are not actually like this, but not a good first impression. This really did not give me a high opinion of the quality of local governance, however).

Heaven knows who you have to be related to be to get one of these airport taxi licences though.

(And if I had not found a bus route? Well, as long as those bars, grocery stores and restaurants had in fact existed and been open, I am sure that there would have been no trouble if I had gone into one of them and asked a barman or cashier how to find a taxi. The “taxi” in question might well have ended up being a private car driven by the barman’s brother in law, but the negotiated price would have been much fairer).

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